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Impacts of Tyler v. Hennepin on New Jersey Tax Sales

Rachel Seidensticker
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The country recently crossed the six-month milestone since the Supreme Court ruled on Tyler v. Hennepin County

Since the ruling, investors and attorneys in every state have had the task of figuring out how the ruling affects local tax sales. 

Because each state has different laws and regulations surrounding tax sales, the impact of Tyler v. Hennepin County varies by region. 

Brian Seidensticker, CEO of Tax Sale Resources, recently spoke with Marc Rubinsohn, CEO of Pro Capital, to discuss how the industry has shifted in New Jersey since the ruling in May.

Why are we discussing Tyler v. Hennepin County?

The Tyler v. Hennepin County case was regarding a Hennepin County resident, Ms. Tyler, who was delinquent on her property taxes. 

Hennepin County eventually foreclosed on the property as their property tax laws dictated. 

The county sold the condo for $25,000 more than the taxes, interest, and fees due. 

So, it paid off the debt and had a substantial amount left from the sale.

However, the county kept the surplus, as was its standard practice. 

Ms. Tyler contested that the extra money belonged to her because it came from the sale of her house and sued the county over it. After local courts dismissed her case, she petitioned the Supreme Court.

The Supreme Court heard the case and ruled on Ms. Tyler’s side, saying that she retained her property rights despite falling behind on her property taxes. 

As a result, the equity in her home belonged to her after the state of Minnesota sold her home to recover the taxes, interest, and fees. The Fifth Amendment protects against the seizure of home equity, meaning the county can’t automatically claim a surplus in this kind of situation.

This ruling caused a giant wave throughout the country because until that point, Minnesota’s handling of the surplus was lawful. 

In addition, several other states had similar practices. The ruling means each state must review its tax sale code to ensure compliance with the ruling. 

While states like Minnesota may have to completely switch their processes, the necessary change in other states may not be as clear. 

The following is a discussion about how the New Jersey government and body of tax sale investors have changed and will continue changing because of the ruling.

New Jersey Legal Changes

While it makes sense to discourage counties from profiting off of tax sales, scenarios like Tyler v. Hennepin County don’t happen often. 

Much more frequently are tenant-inhabited properties with owners who collect rent and don’t pay the property taxes. In addition, abandoned properties without owners to lay claim to any portion of the sales account for another chunk of tax sales.

In other words, Ms. Tyler’s situation is the exception in most tax sale scenarios, and it’s challenging to limit the legal ramifications from affecting a run-of-the-mill tax lien. 

So, although protecting owners with delinquent taxes is critical, legal changes due to the Supreme Court ruling may have ripple effects on swaths of tax sales that don’t fit the same circumstances because most tax liens don’t involve interested owners who insert themselves into the process.

At the moment, the New Jersey state legislature and the counties are still deliberating on what kind of law to implement in response to the Supreme Court case. 

Proposed changes include a sheriff’s sale for liens, which is unlikely to pass. 

As the changes from the recent election occur within the government and the holiday recess delays legislation, the state will head into the next year with decisions to make about how to address the issue. 

That being said, it could take years to formulate precise legislation to tackle the problem.

Impact on New Jersey Tax Sales

The unintended consequences of new tax sale laws in New Jersey could translate to unnecessary litigation and costs for the typical tax lien.

Because tax lien investing in New Jersey already means losing money on approximately 50% of properties, investors will scale back operations if they expect lower returns. Otherwise, they won’t make money on their business.

Remember, the tax sale process in New Jersey is already lengthy. 

It typically takes four to five years after the owner stops paying taxes for an investor to receive the property. If an investor doesn’t take on the property, it continues to sit abandoned.

These results would be bad news all around: if investors buy and restore fewer homes, more abandoned homes will continue to sit neglected. Property values will decrease, tax revenues will remain low, and municipalities will increase property taxes to compensate for lost revenue. 

New Jersey already has the highest property tax rates in the country, making any tax hikes an unwelcome change. 

However, without adequate tax revenue, municipal services vanish, putting counties and residents alike in a tough spot.

It also means that municipalities will manage more real estate than before, a consequence that towns and investors don’t want. 

There are counties in New Jersey still addressing foreclosures from liens that came up for auction back in the 80s that weren’t bought. On the other hand, a steady stream of liens flowing to investors is more cost-efficient for all parties involved.

In addition, fewer active investors mean fewer bids per auction. 

The more bids a lien receives, the lower the interest rate. So, dwindling investor activity would create higher interest rates, inhibiting the few property owners trying to repay their delinquent taxes.

New Jersey also differs from states like Illinois, which sometimes offers refunds for properties that don’t meet investors’ expectations. 

Conversely, New Jersey is a buyer-beware market among tax lien states, meaning counties don’t give refunds regardless of what the investor was told about the property or ends up receiving. 

In other words, stringent laws from Tyler vs. Hennepin County could exacerbate the risks investors already take even when they perform due diligence.

Remember, the general takeaway from the Supreme Court case is that counties should not make tax liens a profit center. 

This ruling is sensible for cases like Ms. Tyler’s because surplus cash should go to owners. 

However, investors should have a streamlined path to ownership so they can repair abandoned properties. 

These two priorities can create tension, necessitating a nuanced legislative solution.

The Bottom Line for New Jersey Tax Lien Investors

The aftermath of the Supreme Court ruling in Tyler vs. Hennepin County has triggered a significant ripple effect across the nation, impacting local tax sales and forcing a reevaluation of existing practices. 

The ruling, which emphasized the protection of property rights even for those delinquent on taxes, has led to a reassessment of tax sale codes in various states, including New Jersey.

In New Jersey, the ongoing deliberations within the state legislature and counties underscore the challenges of adapting to the legal changes mandated by the Supreme Court. 

While the intention is to safeguard property owners with delinquent taxes, Ms. Tyler’s unique circumstances raise concerns about unintended consequences affecting more common tax lien scenarios. 

The proposed legal changes, still under consideration, may take years to materialize, leaving investors in suspense over the industry's viability in the state.

Ultimately, finding a middle ground is crucial to ensuring the stability of the real estate market, fostering economic growth, and preventing adverse consequences for property owners, investors, and municipalities alike. 

At Tax Sale Resources, we're hopeful that top figures in the business can continue giving input to the legislative process to create a solution that follows Tyler vs. Hennepin County while maximizing opportunities for investors in New Jersey.

Author - Rachel Seidensticker
Rachel Seidensticker
Chief Operations Officer
In the Tax Sale Industry Since 2010
Rachel is responsible for managing and overseeing the daily operations of Tax Sale Resources, which produces data for approximately 8,000 nationwide tax sales yearly. She started in the tax sale industry originally as an investor but decided to change course and team up with her brother (Brian Seidensticker) to build Tax Sale Resources quickly thereafter.

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